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The Dollar is Toast, and Here's Just Some of the Reasons Why

Apr. 16, 2009 8:01 PM ET1 Comment
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1. Monetization of Treasuries - Simply put, the Fed has officially begun its endeavor to print our way to prosperity. This has never been done before in the modern U.S., and historically it has never been done successfully anywhere I am aware of. It really doesn't matter whether or not you think it's "necessary", because it won't work; it always leads to a loss of faith in the paper.

Simple math helps explain this. It makes no sense at all to be paid a small amount of "dollars" for a day's work, when vast quantities of these same "dollars" can be clicked into existence at the whim of one man. Ask yourself: are you incapable of producing anything of value in an hour? A day? A week? Eventually, even well-indoctrinated people figure it out. If the output of a printing press has genuine, lasting and demonstrable value, why don't we just print our way to prosperity? If the printing isn't a destructive act, why don't we do it all the time? No supporter of QE has ever furnished a complete answer. The closest I've ever gotten is the standard "they're just replacing lost money." Well, did the lost money have value? What does it mean to "lose money" if we can simply print up more money of equal value? If the solution to "losing money" is merely to print more, and if this new money has real value, then WHY DON'T WE JUST PRINT UP ENOUGH TO MAKE EVERYONE RICH? Why do we give it to the banks and not to the people who "lost" it in the first place? If you follow the monetarists' views to their logical end, their fiat currency is NOT a store of value, it is merely a medium of exchange that can be replaced without consequence by printing.

2. The Lender of Sole Resort - The Fed's position astride the financial system is irreversible, and grows more so with each passing day. While political opposition to bailouts has stiffened only marginally, wimpy politicians have sought alternative means for bailing out their Wall Street banking patrons. Their answer: Fed guarantees. The Fed and the Treasury together have lent, spent, or promised $12.8 Trillion dollars. This is roughly equivalent to the GDP of the U.S. How will they extract themselves?

With the Fed providing the base capital in the short markets and having taken onto its own books so much bad debt including MBS at its alphabet-facilities, how will they ever be able to raise rates? Raising rates means less demand, less demand means lower prices for houses, lower prices for houses means…well, you get the idea. So how will the Fed ever extract themselves from their dominant market position? How will they ever be able to respond to inflation by raising rates? There is only one way for them to even attempt it, and everyone knows it: by transferring all their liabilities onto the backs of the U.S. taxpayer by converting it all to Treasury debt. The Fed, after all, is a private bank. How's that for a plan?

3. US Budget Deficits - Almost never discussed anymore are the long term impact of U.S. budget deficits. The deficits are always going to be reduced "in future years". How long are we going to fall for this? Where is the money going to come from, Ben's printing presses? Is any other source available? Without Ben's QE, who would loan us this much money? If the world loaned us this much money, would there be any left to fuel productive economic activity (you know, making stuff)? WHO BELIEVES THIS GARBAGE?

"Tomorrow, tomorrow, I love ya, tomorrow, you're only a day away"

- From the Broadway Musical "Annie"

Other factors: In a deflation, tax revenues collapse. We don't even have space to talk about insurance companies, pension plans, state and local governments…

4. Finally, the single most compelling reason why the dollar is toast: because the Fed and the Treasury have absolutely no choice other than to try to reinflate the system. I believe those two organizations are immutably committed to reinflation. They have been telling Americans for decades that they are in charge of the economy and that they are masters of our economic fate. Politicians and bureaucrats exist to do something, even if it's wrong. Doing nothing is never an option, even when nothing is the right thing to do, even when doing nothing would cause the least harm of all available options. They will do something because they MUST do something.

An entire generation of Americans believe that the Fed is both omnipotent and competent. They believe that government has a vital and proper role in managing the economy, even to the point of picking winners and losers. They believe that the government and the Fed can be trusted with this awesome responsibility, and they trust these organizations to look out for their interests and act responsibly. In short, they believe in the power of government and central planning as positive forces. The failure of these powerful actors to pull us out of this economic crisis will be correctly seen as a failure of central banking and government economic control. The fallout from such a failure will be devastating to the desires of government for generations to come. And that simply cannot be allowed.

Some of you will protest: "But all the measures Ben has implemented have failed, so there will be no inflation". That is myopic, bordering on stupid. What makes you think they've finished trying? I assert they will not stop trying until they either observe the desired inflation or the dollar collapses. I make that assertion because I believe they cannot stop for the reasons I laid out above. There is simply too much at stake, and the consequences of failure are too high.

As for me, I believe the dollar will collapse. Which politician in a position of authority will stop the madness before it's too late? Frank? Pelosi? Dodd? Obama? The prospect is laughable.

Disclosure: The author is not a financial professional, please do you own due diligence (DYODD). The author is long precious metals and various dollar short instruments, and is holding them with strong hands. The author maintains a substantial cash position as well.

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